China Unicom (Hong Kong) (HKG:762) Has More To Do To Multiply In Value Going Forward

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at China Unicom (Hong Kong) (HKG:762) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on China Unicom (Hong Kong) is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.033 = CN¥13b ÷ (CN¥643b - CN¥251b) (Based on the trailing twelve months to March 2023).

So, China Unicom (Hong Kong) has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Telecom industry average of 6.3%.

View our latest analysis for China Unicom (Hong Kong)

Above you can see how the current ROCE for China Unicom (Hong Kong) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering China Unicom (Hong Kong) here for free.

SWOT Analysis for China Unicom (Hong Kong)

What The Trend Of ROCE Can Tell Us

Over the past five years, China Unicom (Hong Kong)'s ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at China Unicom (Hong Kong) in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. This probably explains why China Unicom (Hong Kong) is paying out 56% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

The Bottom Line

In a nutshell, China Unicom (Hong Kong) has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 25% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing China Unicom (Hong Kong) that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.